Private equity steps into European bank lending gap

Wed Oct 10, 2012 7:13am EDT
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By Simon Meads

LONDON (Reuters) - How do private equity firms deal with banks' reluctance to stump up the money to back buyouts? They become lenders themselves.

When Swedish buyout firm EQT bought BSN Medical earlier this year, another private equity house, Switzerland's Partners Group (PGHN.S: Quote), lent the bandage-making business it had previously co-owned a chunk of the 1.8 billion euros ($2.35 billion) needed to finance the deal.

Private equity firms ranging from CVC CVC.UL, one of Europe's largest, to the smaller H.I.G. Capital are filling the vacuum left by retreating European banks, which have slashed leveraged lending by 42 percent to $72 billion so far this year.

"We have expanded into Europe to help with some of those financing situations," said H.I.G. Capital managing director Haseeb Aziz.

Before the financial crisis, private equity firms typically raised money from investors, such as pension funds and insurers, topped it up with bank loans and bought companies which they then shook up and sold for a profit.

Now, with banks pulling back, private equity houses are also raising debt funds which they use to lend money to companies to help finance buyout deals.

Investors in traditional equity funds are taking a bet on buyout firms' ability to make money by buying and selling companies. For debt funds, success depends on buyout firms lending money wisely - a very different proposition that has already caught regulators' attention.

Buyout firms are starting to look more like investment banks, said Graham Elton at Bain & Co, a management consultancy firm. "The difference between Blackstone and Goldman Sachs (GS.N: Quote) is narrowing every week," he said.   Continued...